Answer:
In the short run Susan can continue operating because her business is making an accounting profit, but unless her revenues increase, she should not continue operating in the long run. In the long run, economic profit/loss = $0, and Susan is not even close. She should keep working in her catering business until she can return to her old teaching job (or get a new one).
Explanation:
Susan's accounting profit/loss = total revenue - total expenses = ($3,500 x 12) - [($1,000 x 12) + ($12,000 x 10%)] = $42,000 - $13,200 = $28,800
Susan's economic profit/loss = accounting profit - opportunity costs
opportunity costs are the extra costs or benefits lost from choosing one activity or investment over another alternative. In this case, Susan's opportunity cost = $36,000 in lost salaries + $1,200 in lost interests = $37,200
Susan's economic loss = $28,800 - $37,200 = $8,400
In the short run Susan can continue operating because her business is making an accounting profit, but unless her revenues increase, she should not continue operating in the long run. In the long run, economic profit/loss = $0, and Susan is not even close. She should keep working in her catering business until she can return to her old teaching job (or get a new one).
